The crippling burden of high taxes is a serious concern for Pakistan’s growing auto industry. From the manufacturer to the vendor, everyone agrees that the colossal taxation is killing growth, innovation, and localization efforts in the industry and curtailing the potential that this sector has for contributing massively to the national economy.
The automobile industry in Pakistan suffers from a plethora of customs and regulatory duties, sales taxes, etc., which jack up the cost of vehicles and make them less competitive and less affordable compared to imported ones. Such high production costs make our locally produced vehicles uncompetitive, muzzling an industry that could potentially create a lot of employment and give impetus to economic growth.
One of the issues that stakeholders raise in this industry is inconsistent changes in policy with regard to the time and frequency of the changes. The instability results in an already high tax burden with a high degree of unpredictability in the investment climate. For vendors and manufacturers, instability relates to stable and predictable policy frameworks that would secure the realization of an investment climate in which long-term investment and planning are made possible.
High taxes have considerably hampered the efforts made to localize the automobile industry in the country. Localization, which is more or less related to increasing the production of vehicle components in a country, is considered an important step in reducing dependency, creating jobs, and advancing technology. Further, such exaggerated taxation leads to the creation of expensive exercises because of the high costs of raw materials and expensive components.
High taxes on imported raw materials and intermediate goods, which are indispensable in the process of local production, aggravate the cost and make such localization uneconomical for most manufacturers. This, in turn, has a tendency to perpetuate a reliance on imported parts, negating all benefits accruing from localization.
In view of this, stakeholders are now calling for comprehensive tax reforms seeking to reduce the financial burden on the automobile sector. They want a reduction of customs duties and regulatory duties on raw materials and intermediate goods so as to reduce the cost of production through localization.
However, far more important is the need for a policy framework that is consistent and transparent. Frequent changes in policy result in unfriendly environments, and will equally be a great dampener to investor confidence, particularly in long-term strategic planning. What is required is a stable policy regime that can give this industry a shot in the arm, so to speak, coupled with localization incentives in a tax regime.
This has more significant economic consequences, as the high tax burden on the automobile sector means that prices for vehicles are exorbitantly high; a resultant effect is vehicle demand is lowered, as consequently is the entire value chain, from producers to sellers. Low sales translate to underproduction, which affects employment and economic activity. The underutilization of this highly GDP-contributing sector occurs due to these constraints.
Apart from this, the import-based system results in a large outflow of foreign exchange by way of imports of vehicles and components. The opposite conditions are there in those countries where an automobile industry is localized; it results in foreign exchange conservation, stimulation of employment, and technological development; so, tax reforms and policy consistency are not just industry demands but economic imperatives. High tax in the domestic automobile industry is a problem, and that has to be handled through multiple vectors. The first is the manner in which the government would need to engage the industry in substantive talks with the industry and listen to their pain points in order to offer joint solutions. Reduction in taxes on raw materials and components is the first crucial measure to make localization more cost-effective.
A policy and regulatory framework that is predictable and stable has to be put in place. The policy environment has to be committed to long-term policies that, with clarity, ensure surety for investors. It will attract investment from both local and foreign sources and lead to growth and innovation in the sector.
Incentives have to be directed toward popularizing localization. In fact, they have to include tax holidays, local production subsidies, and R&D grants. Localizing with governmental support will help build a solid and self-sustaining automobile industry with a cascading effect on economic growth.
Infrastructure and management of supply chains, apart from tax reforms and policy stability, will be accommodated. Good transport networks and technological upgradation with logistical support will further bring down the costs and induce local production. An overall approach that should be taken up by the government incorporates tax relief, policy consistency, and infrastructure development to turn the automobile segment into a major contributor to economic advancement.
These high domestic automobile sector taxes in Pakistan adversely affect the growth and development of this sector. Only through extensive tax reform and by making a predictable policy frame can the government unlock this potential sector, leaping forward both economic growth and technological advancement.
A way toward a booming automobile industry is free from high tax burdens and an atmosphere that encourages investment and innovation. In fact, a successful automobile industry can thus be the driver of extended economic growth. Lower taxation, coupled with enthusiastic localization and a stable policy environment, can make the automobile sector in Pakistan highly competitive and dynamic. This sector would be able to meet the local demand and will also help the country become a significant player in the international automotive market. The results of such a policy would not end in the industry but would also include job creation, technological growth, and continual economic development of a country.
The writer is staff member.
